Don’t bank your retirement on your business

Many business owners make the mistake of ignoring superannuation in preference for re-investing spare funds in their business, hoping they can then sell at a premium when it comes time to retire.

At some magical time in the future, they dream they can ring a bell, sell their business for their asking price, bank a cheque, turn the lights off, and walk away. Sounds perfect, doesn’t it?

In reality, they are embarking on a very risky exit strategy.

It might be that when they do decide to sell, they struggle to find a buyer. Or they find a buyer, but the buyer does not want to pay the price they were hoping for.

This is even harder if you own a farming business.

The idea of passing the farm on to the next generation can be deeply embedded within farming families, but if that happens, how does the older generation fund their retirement, which may stretch for decades?

As with anything, if you fail to plan, you plan to fail.

Your first step must be to contact your accountant or business adviser to determine what they think of your business, its potential value as it stands and what, if anything, you can do to improve its value to a new owner.

While you might think your business is in good shape, an outsider may not unless you use state-of-the-art accounting and software systems and have a clearly documented operations manual, for example. As a result, it may take several years to get your business to a place where an outside buyer would find it attractive.

And then, of course, you should have several years not just of steady profits but steady growth to entice a prospective buyer.

A realistic, independent assessment of what a buyer may pay for your business should be undertaken. With all the hard work you put into running your business, it can be easy to overestimate its value, and this is where independent outside advice is essential.

If there is a risk that you might not get the price you think you need to fund a long and happy retirement, then maybe you should think outside the square:

  • Can you make a strategic acquisition that might make your business more attractive to a buyer?
  • Can you take on a junior partner or look within your existing business to determine if someone already working in it might like to take over from you in the future? Can you help them achieve that goal?

Finally, as a stop-gap, think of boosting your existing contributions to super during the final years of running your business. The more money you have in super, the less pressure there will be for you to obtain top dollar for your business when you sell.

Moreover, you can structure your superannuation contributions to legally minimise any tax liabilities. And, of course, you may be able to use superannuation to reduce any capital gains tax liabilities you might expect on the sale of your business.

Having a healthy nest egg within super will also put you in a much stronger position when negotiating the sale of your business and may give you some much-needed breathing space to negotiate extended payment terms should you need to.

McConachie Stedman Financial Planning is an Authorised Representative of Wealth Management Matters Pty Ltd ABN 34 612 767 807 | AFSL 491619